‘Fiscal Cliff’ Could Put Millions of Taxpayers Into ‘AMT Shock’ [$33,750

One of the key questions lurking in the "fiscal cliff" talks — though well below the public's radar — is what happens to the alternative minimum tax — or AMT.

Implemented in 1969 to make sure upper-income Americans pay their share of taxes, the AMT has increasingly snared more middle-income Americans over the years because it was never indexed for inflation.

During the 2011 tax year for example, the higher tax hit single taxpayers with incomes as low as $48,450 and joint filers making only $74,450.

But millions more Americans could be subject to the AMT in their 2012 returns if Congress fails to reach a deal on the fiscal cliff before year-end. That's because the AMT is currently scheduled to hit individuals making as little as $33,750 a year and joint filers making $45,000. (Read More: Complete Coverage of 'Fiscal Cliff')

"I call it AMT shock," Dick Hoey, chief economist at BNY Mellon, told CNBC recently.

"Normally some four million people pay the AMT," Hoey explained. "But if we don't fix this on the 2012 income, what's due in 2013 will be additional taxes by an extra 28 million households. If you're in the $75,000 to $300,000 income bracket, you can likely forget about a refund if they don't fix it."

The bite on American households would be huge and could have a big impact on US consumer spending—and the economic recovery. (Read More: Stocks Are Being 'Cliff'-Lashed)

"This would hit immediately and likely cost taxpayers an average of some $3,700 in taxes," said Leon C. LaBrecque, managing partner and founder of LJPR, LLC, a wealth management firm. "It would be a rude awakening to say the least."

Yet even if Congress resolves the fiscal cliff, more Americans could still end up seeing a huge tax increase under the AMT. That's because the tax itself is part of the negotiations over ways to boost government revenue. And Congress would need to act separately — putting in a so-called patch — to insure more people aren't subject to it because of inflation.

"It's hard to plan for the AMT with all the uncertainty," said Howard Kaplan, a CPA/PFS in Englewood, N.J. "People are dealing with possible capital-gain tax increases, they don't know what deductions may be gone and wondering if they should sell or keep stocks at the end of the year. The AMT is complex beast on its own and it's even more complex now without a patch and the 2000 year targets."

The AMT is essentially a parallel tax in that excludes certain deductions — like state and local income taxes — for people making a certain income level each year. That means taxpayers in AMT brackets have to figure out which tax is more, the AMT or regular taxes — and then pay the higher amount.

AMT rates currently range from 26 percent for singles to 28 percent for married.

To keep middle-income people from being unfairly hit by the AMT, Congress has enacted temporary relief during each of the past several years — so-called patches — that raises the income levels. But so far there is no patch for 2012.

The alarm bells over the patch — or lack of one — have reached the point where the acting commissioner of the IRS sent a letter to Congress this month saying the tax collection agency would need to tell some 60 million taxpayers that they may not file their 2012 tax returns or receive a refund until the IRS makes changes to its system (a patch) and that "they might not be able to file returns until late March of 2013."

The Bush-era tax cuts — set to expire at the end of the year as a part of the fiscal cliff — where a boon to some but actually pushed more people into the AMT, after they figured out which tax bill was higher.

More than half of AMT revenue in 2010 came from households with incomes over $200,000, according to the Center on Budget and Policy Priorities. But as AMT rates are not indexed to inflation, more upper middle incomes are hit by the tax than the targeted high end incomes.

"If you're income is high enough you get moved out of the AMT. It really effects the $300,000 to $500,000 income levels, and states like California and New Jersey where people can't deduct children or state income taxes," LaBrecque added.

As for what Congress and President Obama will do in the weeks ahead about the cliff and the AMT, that's a guessing game said LaBrecque.

"They could keep some of the Bush tax cuts and do a patch, not keep them and do a patch. Some people might not get hit by the AMT, some may. It's hard to make sense at this point," LaBrecque said.

Anyone looking for a permanent end to the AMT as part of a long term tax reform package, will be disappointed say analysts. The tax simply brings in too much revenue with no replacement in sight.

The original AMT collected just $122 million — about $700 million in today's dollars — which was just over one-tenth of one percent of all individual income tax revenue. Fast forward to the last tax year of record, 2010, and some $102 billion was collected.

Congressional Republicans have called for ending the AMT, while President Obama said on the campaign trail this past year, that he'd let it go and replace it with the so-called Buffett Tax, a higher tax rate on the very upper income levels.

Meanwhile, the Senate Finance Committee released a proposal on taxes this past August, calling for an increase in the AMT exemption amounts for 2012 to $50,600 (individuals) and $78,750 (married). The proposal would also increase the exemption amounts for 2013 to $51,150 (individuals) and $79,850 (married). But so far, it remains just a proposal.

For now, all taxpayers can do is look to some sort of patch and hope for the best, said Melody Juge, director of Life Income Management, a retirement management firm.

"These guys (Congress and the president) aren't that dumb that they wouldn't do a patch on this," Juge said. "I think they'll do the right thing on the AMT. But honestly, I think the best thing would be a flat tax, end deductions and get rid of the AMT once and for all."

well, you're going to hear this a lot but... I wish I was a healthy 32 year old engineer. The rest I would deal with as it comes.

From my perspective, the age ahead will be one to develop self .... physically, spiritually, and for practical means of being self sufficient. As an engineer you already have the golden talent of being able to figure out how to “fix” things. You can use that talent for yourself, and for others!

I suggest you start now to preserve some of your wealth while it is being provided by an employer- buy yourself at least a couple gold coins and a couple pounds of silver coins every year and set them aside in a safe place in your possession. (I like Eagles and Maple Leafs, and also started junk silver coin collections for my kids).

If nothing else, your grandkids will enjoy playing with them someday

If someone had bought me a gold coin and a pound of silver coins for my birthday every year - and I started buying some for myself when I was 32 - I might be posting this from Singapore!

I’d love to transfer some of my money to tangible assets, but I Don’t know where to go or where to start. Everyone’s out for their own interests, and I’m not learned enough in the business to understand or know where to get the best buys.

If you have suggestions, I’m open to listen. At this point I’m simply stockpiling lead, steel, and food.

And I thank you for your kind words. My wife calls me an “old soul.” I often feel much older than 32.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.